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Explain what cash basis means in this statement: “An income and expense statement should be prepared...

Explain what cash basis means in this statement: “An income and expense statement should be prepared on a cash basis.” How and where are credit purchases shown when statements are prepared on a cash basis?

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Answer : It means method of preparing financial statements in which only transactions involving actual cash inflows or cash outlays are recorded. Only cash income and cash expenses are recorded. Cash means coins, debit card, credit card transactions, currency etc.

In cash basis accounting , transactions are posted only when there is cash effect. When statement are prepared on cash basis, on credit purchases nothing posted in statements but when actually payments will made against credit purchases, transactions will be recorded.Hence credit transactions are to be recorded in the respective day book i.e. purchase day book / sales day book.  

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